403(b Non-ERISA and Investment Changes

[DTH]

If an investment adviser suggests to change a non-performing fund and the employer agrees would that action violate the DOL non-ERISA safe harbor? I don't think so; the plan can continue to be non-ERISA. Can you please confirm. Thanks!

[Belgarath]

I don't agree. Take a look at FAB 2010-01, Q&A-18.

P.S. here's the question:

Q18: May a safe harbor non-Title I arrangement authorize the employer to change 403(b) providers and unilaterally move employee funds from one provider to contracts or accounts of another provider?

No. Although an employer can decide, within the terms of 29 CFR 2510.3-2(f), to limit the providers in a safe harbor arrangement to which it will forward employee salary reduction contributions, discretionary authority to exchange or move employee funds would be inconsistent with the safe harbor requirements.

[DTH]

Thanks Belgarath. What if the decsion makers were a retirement plan board made up of employees. However, these employees consist of a board of director memeber, an officer of the company, and HR manager? Thanks.

[Belgarath]

They are still appointed by the employer - this still blows your safe harbor. Mind you, this is a safe harbor we are talking about, so it might be POSSIBLE (although I don't necessarily see how) for an employer to perform this function and successfully argue that it is still exempt from Title I. Wouldn't want to attempt this argument myself...but if it is important enough, (and there is enough money involved) it might be worth the employer's expense to bring this before ERISA counsel.

While this might be just responsible review, it seems to usually have the impetus from someone who stands to collect a commission from the asset change...

[DTH]

I reviewed the FAB Q&A 18 and it is referring to changing 403(b) providers. Non-ERISA plans generally have participant-directed contracts. If the employer allows for another provider, participants would have to direct the old provider to transfer their account into the new provider's contract.

In my scenario the employer is not changing providers rather the investment advisor is looking at the investments under one of their current approved providers. The advisor is suggesting to remove a non-performing fund and replacing it with a better one. Affected participants would be notified that the fund is going away and if they don't select another investment, the non-performing fund assets will be moved into a recommended replacement. Would this result in the same (i.e., plan becomes subject to ERISA)?

If yes, would a recommendation of leaving the non-performing fund in the investment lineup and add the better performing one. Participants would be notified of the new fund and it would be up to each affected participant to decide to stay in the non-performing fund or move to another fund. I think this may be okay.

Lastly, if a fund closes it will need to be replaced. What can be done to keep the plan within the safe harbor?

Thank you.

[Belgarath]

Personally, I think the distinction between unilateral authority to change providers and unilateral authority to force a change in investment options within the offerings of a single provider is insignificant. The point is, the employer is mandating the change. As I said, I wouldn't want to have to argue this with the DOL when trying to prove non-ERISA status.

Adding a new fund, so participants have a choice to stay in existing fund, or move to the new fund? I see no problem with that, of course based upon all "relevant facts and circumstances."

If an existing fund closes, then I cannot see any problem, even from the DOL, with adding some new fund option to replace it, again subject to all "relevant facts and circumstances."